Selling the Business:
Games Buyers Play
by Verne Harnish “Growth Guy“
www.gazelles.com
Selling the Business: Games Buyers Play
www.gazelles.com
Selling the Business:
Games Buyers Play
Entrepreneurs work years building up the value in their business
only to give a big chunk of it away when it comes time to sell.
Why? Savvy corporate acquisition teams have a prescribed method
for wearing down the most seasoned entrepreneurs, backing them
into a corner where they have to sell for a steep discount.
Here are some of their dirty tricks.
PROMISES, PROMISES
The buyer offers the
entrepreneur an insanely
large price for the business and suggests the deal
can close in weeks.
The first step is counterintuitive, which is why it’s so effective.
The buyer offers the entrepreneur an insanely large price for the
business and suggests the deal can close in weeks.
The offer – always expressed as some multiple of EBITDA,
to condition the entrepreneur to become overly sensitive to
expenditures – will be a price that is 50 % to 200% more than
what even the entrepreneur thinks the business is worth. It looks
like the deal of the century.
Why would buyers do this? To get entrepreneurs to drop their
guard. Nothing builds a temporary relationship faster than offering a premium price for the business. I say “temporary,” because
entrepreneurs are not likely to stick around after the sale.
Copyright © 2013 Verne Harnish. All Rights Reserved.
[email protected].
1
Selling the Business: Games Buyers Play
www.gazelles.com
It also gets entrepreneurs and their spouses dreaming about the life
they’ll lead after the sale – the houses, boats, and vacations – and
planning for what they’ll do once they have a boatload of money.
If I had a nickel for
More importantly, buyers do this to entice sellers to sign an exclusivity agreement that prevents them from talking with other
potential buyers for six months during the due diligence period –
which they promise will go quickly. Entrepreneurs will usually
sign on the dotted line, relieved that they are going to get a great
price – even if it is ultimately half of what’s offered – and not have
to deal with other buyers – which is extremely time consuming.
But that’s the beginning of their downfall.
every time an entrepreneur heard “It’s just a
couple weeks more”
we could all retire.
POWER PLAYS
Once the document is signed, buyers will drag out due diligence
for months, while promising that everything should be wrapped
up shortly. If I had a nickel for every time an entrepreneur heard
“It’s just a couple weeks more” we could all retire.
And as due diligence gets dragged out, because the buyer tied
the selling price to some multiple of EBIDTA, the CEO starts
putting off key expenditures that she would otherwise make to
keep the business humming along – a key hire or media purchase
or training session.
PSYCHOLIGICAL WARFARE
To make matters worse, the buyer starts disrupting the entrepreneur’s
rhythms and life through the infamous “emergency meeting.”
The evening before an entrepreneur departs for a family vacation
or major trade show, the M&A team will call to say that there’s
been a problem with the deal and demand that he or she show up
for a meeting the next day to straighten things out.
Copyright © 2013 Verne Harnish. All Rights Reserved.
[email protected].
2
Selling the Business: Games Buyers Play
www.gazelles.com
Afraid to derail the deal, the frazzled entrepreneur will cancel
plans at the last minute. As a result, both the family and business
team will start leaning on the owner to get the deal done.
The pressure will continue to mount.
DIMINISHED PERFORMANCE
The corporate buyer
wants the company’s
performance to suffer a
little so it can use it as a
giant sledgehammer to
drive down the price at
the 59th minute of the
eleventh hour.
With the entrepreneur mentally checked out of the business in
anticipation of the sale and worn out from missing vacations
and the grind of due diligence – and the business suffering from
a cutback in critical expenditures to pump up EBITDA – the
business unsurprisingly suffers a temporary slump. It’s all part of
the buyer’s game plan.
The corporate buyer wants the company’s performance to suffer
a little so it can use it as a giant sledgehammer to drive down the
price at the 59th minute of the eleventh hour.
Beat up by the entire process, the entrepreneur will begrudgingly
give in to all kinds of last minute demands and concessions affecting the final price of the business.
BIDDING WARS
So what do you do to avoid this scenario – and still unload your
business? First, enlist a good business broker (This is no time for
amateur hour) to set up an auction for you. Don’t let a single
potential buyer call the shots. One friend identified 23 strategic
buyers, of which 7 came to the table to bid for the business.
If a serious prospect wants an exclusivity agreement, limit it to
30 days and require a big deposit – say $ 250,000 – that will be
forfeited if the deal isn’t completed in that window. And have
“the box” of materials prepared in advance so you are bulletproof
during due diligence.
Copyright © 2013 Verne Harnish. All Rights Reserved.
[email protected].
3
Selling the Business: Games Buyers Play
www.gazelles.com
Last, as best you can, insulate yourself from the transaction.
Have your CFO or another trusted executive work with your
broker as a go-between with the buyer, so you don’t get distracted
from leading your team. Push back against last-minute demands
for meetings. You want to be calm and thinking clearly every
time you negotiate – and not fresh out of a fight with your spouse
about cancelling the family vacation.
Overall, keep your head in the game and keep running the business
as if the deal isn’t going to happen up until the moment you cash
the final check!!
Copyright © 2013 Verne Harnish. All Rights Reserved.
[email protected].
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